Copyright 2013 by Larry E. Swedroe. All rights reserved. Except as permitted
Download 1.91 Mb. Pdf ko'rish
|
think-act-and-invest-like-warren-buffett-larry-swedroe(1)
- Bu sahifa navigatsiya:
- TERMS OF USE
- Introduction: Why I Wrote This Book E
- ACTIVE VERSUS PASSIVE INVESTING
- THE VALUE OF FORECASTS
- MARKET TIMING
|
Copyright © 2013 by Larry E. Swedroe. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. ISBN: 978-0-07-180996-2 MHID: 0-07-180996-1 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-180995-5, MHID: 0-07-180995-3. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for
use in corporate training programs. To contact a representative please e-mail us at bulksales@mcgraw- hill.com. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal,
accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. —From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw- Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw- Hill’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO
THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw- Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw- Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise.
This book is dedicated to four of the most important people in my life, my grandchildren—Jonathan, Sophie, and Gracie Rosen, and Ruby Jane Morris Contents Introduction: Why I Wrote This Book 1. Want to Invest More Like Warren Buffett? Start Taking His Advice 2. Want to Invest More Like Warren Buffett? Start Thinking Like He Does
3. Should You Be an Active or a Passive Investor? 4. The Need to Plan: It Is Not Only About Investments 5. How Much Risk Should You Take? The Asset Allocation Decision
6. How to Build a Well- Designed Portfolio 7. The Care and Maintenance of Your Portfolio 8. Should You Hire a Financial Advisor? 9. Winning the Game of Life Conclusion 30 Rules of Prudent Investing Notes Sources
Index Acknowledgments Introduction: Why I Wrote This Book Each of my 12 books is about what I call the “science of investing,” the evidence demonstrating the prudent investment strategy. My Only Guides You’ll Ever Need series deals with stocks, bonds, alternative investments, and the designing of the right financial plan. My Wise Investing series is a collection of stories and analogies designed to demonstrate that the winning investment strategy is a simple, elegant, and logical one. And because it is so simple, requiring little effort (though lots of discipline), it is also the winning strategy in life. What I have learned from my experiences is that not many people will devote a lot of time to learn about investing despite its importance. It is difficult to get them to read a 300-page book that cites dozens of studies. That is why I have written this book.
Think, Act, and Invest Like Warren Buffett is designed to explain how adopting some basic principles can help you outperform the vast majority of investors and increase the chances of achieving your financial and life goals. Over the years, I have talked to thousands of people about investing. I have learned there are some individuals who can be successful investors on their own. If you believe you fall into that category, Chapter 8 provides five important questions for you to answer before you decide to go it alone. Many others have found great benefit in working with an advisory firm. For those who want to consider working with an advisor, Chapter 8 also provides information on how to perform thorough due diligence as you search for a fiduciary advisor who can truly add value, such as making sure your investment plan is part of an overall financial plan that addresses estate, tax, and insurance issues.
1 Want to Invest More Like Warren Buffett? Start Taking His Advice If investors were asked, “Who do you think is the greatest investor of our generation?,” an overwhelming majority would answer, “Warren Buffett.” If they were then asked, “Should you follow the advice of the person you consider the greatest investor?,” you would think that they would say, “Yes!” The sad truth is that, while Buffett is widely admired, the majority of investors not only fail to consider his advice but also tend to do exactly the
recommends. To demonstrate the truth of this statement, we will review Buffett’s investment guidance and see if people have actually followed it. We will review his advice on three issues: 1. Whether you should invest in actively managed or passively managed mutual funds (such as index funds). 2. Whether you should listen to market forecasts. 3. Whether you should try to time the market. Actively managed funds attempt to uncover and exploit securities the market has “mispriced,” buying those they believe are undervalued and avoiding those they believe are overvalued. Actively managed funds may also attempt to time investment decisions to be more heavily invested when the market is rising and less so when the market is falling. In contrast, passively managed funds are basically buy-and-hold vehicles that eschew stock picking and market timing, believing the costs outweigh the benefits. Active investors also look to “experts” for an investing edge, while passive investors ignore such advice. Before reviewing Buffett’s advice, it is important to note that he knows that you cannot invest exactly like he does. You cannot buy entire companies and incorporate them into Berkshire Hathaway, nor can you negotiate special deals during crises, when companies such as Goldman Sachs are willing to pay “top dollar” to have Warren Buffett invest. However, you can follow his guidance about the right investment strategy. As you read Buffett’s advice, ask yourself if you have been practicing what he preaches. Let’s begin with Buffett’s advice on which type of funds you should invest in. ACTIVE VERSUS PASSIVE INVESTING The following are some of the Oracle of Omaha’s words of advice on this important decision: • “By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.” 1 • “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat [emphasis mine] the net results (after fees and expenses) delivered by the great majority of investment professionals. Seriously, costs matter.” 2 • “Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: all they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would
have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.” 3 • “So many investors, brokers and money managers hate to admit it, but the best place for the average retail investor to put his or her money is in index funds.” 4
What is difficult for many investors to understand is that indexing works because not
(trying to pick stocks or mutual funds or trying to time the market) produces better results than making them. Of course, no one on Wall Street would ever admit that. Remember, Wall Street benefits from the higher fees and greater commissions generated by active strategies.
It needs you to play the game of active management because that is its winning strategy. We now turn to Buffett’s advice on whether you should pay attention to economic and market forecasts. THE VALUE OF FORECASTS The following is Buffett’s advice on whether you should be paying attention to the latest forecasts from so-called economic and market experts: • “We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie [Munger] and I continue to believe that short-term market forecasts are
poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” 5 • “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing
the predicting.” 6 Most investors find it hard to believe that their life would be better without so much information and that ignoring the investment noise would improve their performance. This leads to the condition I call “CNBC- itis,” the need to “tune in.” While investors believe they are tuning into valuable information, what they are
generally hearing is nothing more than what Jane Bryant Quinn calls “investment porn,” and what she feels are “shameless stories about performance that tickle our prurient financial interest.” 7 Instead of tuning in, you should be tuning out. Buffett implores investors to ignore forecasts because they tell you nothing about where the market is headed.
Research also proves this. The following is a brief summary of that research: • Economists’ forecasting skill has been about as good as guessing. Even those who directly or indirectly run the economy—such as the Federal Reserve, the Council of Economic Advisors and the Congressional Budget
Office—have forecasting records worse than pure chance. Even worse, just when you need the forecasts to be most accurate, they have been the most wrong. Economists have not predicted the turning points.
8 • There have been no economic forecasters who consistently lead the pack in forecasting accuracy. 9 • Increased sophistication in forecasting has not improved the accuracy of forecasts. 10 • The only thing that relates to forecasting accuracy has been fame, and the relationship has been negative. The more famous the forecaster, the more inaccurate the forecasts. 11 Why do investors pay attention to forecasts, ignoring the evidence and Buffett’s sage advice? My experience has convinced me that this irrational behavior is caused by an all-too-human need to believe that there is someone who can protect us from bad things, such as bear markets. Unfortunately, there is only one “person” who
knows where the market is going. If we ask Him, we won’t get an answer, at least not in this lifetime. And in the next one, it won’t matter. This is why whenever I am asked about my forecast for the economy or the market, my answer is always the same: “My crystal ball is always cloudy.” What we have learned is that we are no closer to being
able to predict the market despite all the innovations in information technology and decades of academic research. The next time you are tempted to act on some guru’s latest forecast, ask yourself the following questions: • Is Warren Buffett acting on this expert’s opinion? • If he isn’t, should I be doing so? • What do I know about the value of this forecast that Buffett (and the market in general) doesn’t? Author Carl Richards, in his book The Behavior Gap, recommends asking three questions before you act on someone’s advice or forecast: 12 • If I make this change and I am right, what impact will it have on my life? • What impact will it have if I am wrong? • Have I been wrong before?
MARKET TIMING The following are some of Buffett’s admonitions to those who are tempted to time the market: • “Our favorite holding period is forever.” 13 • “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.” 14 • “Success in investing doesn’t correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble investing.” 15 • “Inactivity strikes us as intelligent behavior.” 16 It can be hard to hear that the best course of action during tough market times is to stay the course. Keeping your head while everyone else around you is losing theirs is difficult. It can be even harder to hear that message repeated while things go from bad to worse. However, the message to stay the course is worth repeating because it is the best advice. Because there is no evidence that there are good forecasters, efforts to time the market are highly unlikely to prove productive. The great irony is that while investors idolize Buffett, they just do not listen to his advice. While investors were pulling hundreds of billions out of the stock market in the wake of the financial crisis of 2008, Buffett was buying. And while investors were once again reacting to the European crisis of 2011,
withdrawing almost $100 billion from stock funds over the six months ending October 2011, Berkshire Hathaway was investing almost $24 billion in stocks. It was its largest commitment of new cash in at least 15 years. 17
down market is when investors should be buying, not selling. While he
admonishes investors against market timing, he does advise that if you are going to try to time the market, you should buy when everyone else is fearful and sell when everyone else is greedy. What Buffett advises is not to sell (as most individuals do) when expected returns are the greatest (because valuations are low). That is when Buffett is generally a buyer. He is not a buyer because he believes he has a clear crystal ball. Instead, he is buying because expected returns are high: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” 18 Conversely, the time to be a seller is not when valuations are low and expected returns are high. Buffett offers this advice on the subject: The most common cause of low prices is pessimism —sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It is optimism that is the enemy of the rational buyer. 19
The time to be a seller is when the “coast is clear” and risks appear to be low. That is when valuations are high and expected returns are low. Buying low and selling high is a much better strategy than the reverse, which is what most investors do. The appealing thing is that there is a simple strategy that allows you to invest more like Warren Buffett, buying
when valuations are low and expected returns are high, and selling when valuations are high and expected returns are low. All you need is the discipline to ignore your emotions and adhere to your investment plan, which should require regular rebalancing. Rebalancing, or the process of restoring a portfolio to its original composition, is integral to the winning investment strategy. It requires you to buy what has done relatively poorly (at relatively low valuations) and sell what has done relatively well (at relatively high valuations). However, it is not easy to maintain the discipline to stay the course because “CNBC-itis,” and the emotions it causes, often get in the way.
Download 1.91 Mb. Do'stlaringiz bilan baham: 
|